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Economic Inequality and the 20-80 Law

Written by Gary North on February 9, 2012

When a Leftist starts analyzing the economy, get ready for a call for government intervention. The failure — every failure –mis a market failure. The cure — every cure — is for more government intervention.

In 1897, Vilfredo Pareto, an Italian economist teaching in a Swiss university, announced his discovery: in every European economy he studied, 20% of the residents had 80% of the capital/wealth. In over 100 years since then, no one has found any nation where the income distribution varied much from 20-80. No set of government policies has changed it. Reformers come and go. The 20-80 rule remains.

This fact does not penetrate the thinking of Leftists.

If an analyst presented evidence that the the distribution has moved from 20-80 to (say)  15-80 or 15-90, I would look at the evidence. If he said that the present crisis is a result of some factor that has temporarily moved the distribution away from a normal Pareto distribution, I would consider the presentation. But first I would ask for statistical proof of the new distribution.

This Leftist offers no evidence here.

During the past 30 years, a growing share of the global economic pie has been taken by the world’s wealthiest people. In the UK and the US, the share of national income going to the top 1% has doubled, setting workforces adrift from economic progress. Today, the world’s 1,200 billionaires hold economic firepower that is equivalent to a third of the size of the American economy.

OK, let’s see the proof. Did what supposedly happen in the US and UK happen elsewhere? Or is there something unique about these two nations? If so, tell me why. Show me the causal factor. Don’t merely assert the effect.

It is this concentration of income – at levels not seen since the 1920s – that is the real cause of the present crisis.

No proof offered.

The effect of this consolidation of economic power is that the two most effective routes out of the crisis have been closed. First, consumer demand – the oxygen that makes economies work – has been choked off. Rich economies have lost billions of pounds of spending power. Secondly, the slump in demand might be less damaging if the winners from the process of upward redistribution – big business and the top 1% – were playing a more productive role in helping recovery. They are not.

Wait a minute. Why is consumer demand low? Rich people either invest their money or spend it. This transfers 100% of their money to others in the economy. So, our Leftist critic ignores the obvious. Workers still get paid. Raw materials owners still get paid.

Britain’s richest 1,000 have accumulated fortunes that are collectively worth £250bn more than a decade ago. The biggest global corporations are also sitting on near-record levels of cash. In the UK, such corporate surpluses stand at over £60bn, around 5% of the size of the economy. This money could be used to kickstart growth. Yet it is mostly standing idle. The result is paralysis.

He thinks the money goes into mattresses. He has no clue about how an economy works. This ignorance of economic theory is universal among Leftists.

 Since 1980, UK growth and productivity rates have been a third lower and unemployment five times higher than in the postwar era of “regulated capitalism”. The three post-1980 recessions have been deeper and longer than those of the 1950s and 1960s, culminating in the crisis of the last four years.

He has yet to identify a cause of the inequality. So, why should we trust his proposed solution?

The factor linking excessive levels of inequality and economic crisis is to be found in the relationship between wages and productivity. For the two-and-a-half decades from 1945, wages and productivity moved broadly in line across richer nations, with the proceeds of rising prosperity evenly shared. This was also a period of sustained economic stability.

Again, what was the cause? Don’t say that the result — inequality — is the cause. But that is what he argues.

The significance of a growing “wage-productivity gap” is that it upsets the natural mechanisms necessary to achieve economic balance. Purchasing power shrinks and consumer societies suddenly lack the capacity to consume.

There is no explanation for this. There is only assertion.

He blames private debt. He does not mention government debt or central bank policy.

In both the 1920s and the post-1980s, to prevent economies seizing up, the demand gap was filled by an explosion of private debt. But pumping in debt didn’t prevent recession: it merely delayed it.

But if private debt rose, spending rose. He does not mention the obvious connection.

Concentrating the proceeds of growth in the hands of a small global financial elite not only brings mass deflation – it also leads to asset bubbles. In 1920s America, a rapid process of enrichment at the top merely fed years of speculative activity in property and the stock market. In the build-up to 2008, rising corporate surpluses and burgeoning personal wealth led to a giant mountain of footloose global capital. The cash sums held by the world’s rich (those with cash of more than $1m) doubled in the decade to 2008 to a massive $39 trillion.

But what was the cause? Central banking was the cause in both periods. He never mentions this.

Capital is invested. It creates jobs. Why blame capital? Because he hates capitalism. He is a standard Leftist. They do not understand economics. They want more intervention by bureaucrats to “make things fair.”

“Only a tiny proportion of this sum ended up in productive investment.” Proof? None offered.

 In the decade to 2007, bank lending for property development and takeover activity surged while the share going to UK manufacturing shrank. While the contribution to the economy made by financial services more than doubled over this period, manufacturing fell by a quarter.

This has been universal in thew West ever since World War II. Asia is where manufacturing’s low-paying jobs have headed. Asians make good products cheaply. Are we to pass laws against customers’ decisions?

Far from creating new wealth, a tsunami of “hot money” raced around the world in search of faster and faster returns, creating bubbles – in property, commodities and business – lowering economic resilience and amplifying the risk of financial breakdown.

Note: he never mentions central banking.

Bottom line: we need more government wealth redistribution. “An economic model that allows the richest members of society to accumulate a larger and larger share of the cake will eventually self-destruct. It is a lesson that is yet to be learned.”

In short, he is a standard Leftist.  When you see arguments like these, think to yourself, “economic ignorance.”

Continue Reading on www.guardian.co.uk

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3 thoughts on “Economic Inequality and the 20-80 Law

  1. Agree!!!

  2. evermyrtle says:

    The rich get richer and the poor get poorer. This seems to be true, so there must be an answer to how it is done!!!!!!!!!! It seems like most of us never are able to get out share.

  3. Here's an idea……if corporations are to be treated as people, they certainly should not be allowed to buy each other. That's slavery, yes? As a 'victim' of multiple m/a's over the last few decades, my experience has been that the worst of times for a corporate employee is that time when the company you work for buys, is bought, or merges with another company. This should hold doubly so for financial institutions and 'buying the competition.' Plus it might be more important for 'separation of private sector & state (control) than church & state. Obviously income taxes that aren't applied equally IS NOT 'equal treatment under the law' Since when do politicians know anything about free enterprise & economics? Stupid is turning the ship over to the cook to sail through the stormiest seas.